(16) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.

The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:


	January 27, 2019				October 28, 2018				January 28, 2018
	Carrying Value		Fair Value *		Carrying Value		Fair Value *		Carrying Value		Fair Value *
Financing receivables – net:
Equipment operations	$	102	$	99	$	93	$	91	$	52	$	51
Financial services		25,048		24,900		26,961		26,722		23,803		23,597
Total	$	25,150	$	24,999	$	27,054	$	26,813	$	23,855	$	23,648

Financing receivables securitized – net:
Equipment operations	$	67	$	65	$	76	$	73	$	125	$	125
Financial services		4,496		4,454		3,946		3,895		4,349		4,303
Total	$	4,563	$	4,519	$	4,022	$	3,968	$	4,474	$	4,428

Short-term securitization borrowings:
Equipment operations	$	67	$	67	$	75	$	75	$	126	$	126
Financial services		4,397		4,391		3,882		3,870		4,302		4,293
Total	$	4,464	$	4,458	$	3,957	$	3,945	$	4,428	$	4,419

Long-term borrowings due within one year:
Equipment operations	$	928	$	937	$	970	$	979	$	289	$	289
Financial services		5,198		5,186		5,427		5,411		6,124		6,127
Total	$	6,126	$	6,123	$	6,397	$	6,390	$	6,413	$	6,416

Long-term borrowings:
Equipment operations	$	4,712	$	4,989	$	4,714	$	4,948	$	5,573	$	6,076
Financial services		23,143		23,217		22,523		22,590		20,849		21,023
Total	$	27,855	$	28,206	$	27,237	$	27,538	$	26,422	$	27,099

* Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.

Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.

Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow:


	January 27		October 28		January 28
	2019*		2018*		2018*
Marketable securities
Equity fund ****	$	51	$	46	$	52
Fixed income fund						14
U.S. government debt securities		120		111		75
Municipal debt securities		51		46		41
Corporate debt securities		141		140		137
International debt securities		15		10		18
Mortgage-backed securities **		146		137		125
Total marketable securities		524		490		462
Other assets
Derivatives:
Interest rate contracts		76		80		94
Foreign exchange contracts		59		83		31
Cross-currency interest rate contracts		3		5		8
Total assets ***	$	662	$	658	$	595
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts	$	232	$	350	$	248
Foreign exchange contracts		64		49		124
Cross-currency interest rate contracts		2				2
Total liabilities	$	298	$	399	$	374

* All measurements above were Level 2 measurements except for Level 1 measurements of the equity fund of $51 million, $46 million, and $52 million at January 27, 2019, October 28, 2018, and January 28, 2018, respectively; the fixed income fund of $14 million at January 28, 2018; and U.S. government debt securities of $44 million, $44 million, and $43 million at January 27, 2019, October 28, 2018, and January 28, 2018, respectively. In addition, $6 million, $8 million, and $15 million of the international debt securities were Level 3 measurements at January 27, 2019, October 28, 2018, and January 28, 2018, respectively.

** Primarily issued by U.S. government sponsored enterprises.

*** Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds and time deposits.

****Beginning in the first quarter of fiscal year 2019, unrealized fair value changes are recognized directly in net income (see Note 3).

The contractual maturities of debt securities at January 27, 2019 in millions of dollars are shown below. Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.


	Amortized		Fair
	Cost		Value
Due in one year or less	$	32	$	32
Due after one through five years		112		111
Due after five through 10 years		101		101
Due after 10 years		84		83
Mortgage-backed securities		150		146
Debt securities	$	479	$	473

Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:


	Three Months Ended
	January 27		January 28
	2019		2018
Beginning of period balance	$	8	$	17
Principal payments		(3)		(2)
Other		1
End of period balance	$	6	$	15

There were no fair value, nonrecurring measurements from impairments in the reported periods. Financing receivables with specific allowances are shown in Note 11. Losses were not significant.

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable Securities – The portfolio of investments, except for the Level 3 measurement international debt securities, is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

Financing Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.